The present invention relates to U.S. application Ser. Nos. 08/430,212 and 08/110,666, both of which are hereby incorporated by reference as if repeated herein in their entirety, including the drawings.
The present invention relates generally to methods for performing negotiations between parties and more particularly to a method for automatically performing a negotiation between multiple parties without necessarily disclosing the identity and positions of the parties to each other. The present invention also relates generally to methods and apparatuses for performing computerized trading, and more particularly to a method and apparatus for performing computerized trading of multiple securities in a single simultaneous transaction. This is known as "linked trading."
In negotiations, parties often desire to negotiate a deal involving something of value to both parties or multiple parties, but are wary of disclosing their willingness to deal on any variable of the deal for fear of losing any negotiating strength. In fact, it is a well-known negotiating tactic to avoid being the first party to suggest an offer, since that sets the stage for the remaining offers. However, it is practically impossible to negotiate without a starting point.
In today's complex world, these negotiations now often involve multiple parties and multiple terms. Occasionally, the parties do not even know all of the other parties to the transaction, e.g., in large exchanges where trades are made between millions of parties who may never even meet face to face. This presents significant difficulties in reaching an agreement even on a single term, much less between millions of parties who may never even meet face to face. This presents significant difficulties in reaching an agreement even on a single term, much less multiple terms.
One particularly good example of this is securities trading, and in particular linked trading of securities. Many trading strategies in current markets involve simultaneous purchases and/or sales of multiple securities, where the combined transaction must satisfy a prescribed price objective. Simple examples of multiple securities trading include: 1) pairs trading, in which a party is interested in buying one security that is perceived to be undervalued using the proceeds from a simultaneous short sell of a correlated security that is perceived to be overvalued, in expectation that both securities will revert to their nominal values, allowing both positions to be closed out at a profit; and 2) buy-write trades that involve the simultaneous purchase of a stock and sale of a call option on the stock, wherein the call premium received partially hedges the risk of a decline in the value of the stock, at the cost of capping the potential profit of an upside move.
More complex examples of linked trades include extensions of pairs trading to more than two securities. One type of multiple securities trading is known as "basket trading," an example of which is index trading, wherein the objective is to buy or sell a defined set of securities (the basket) in a single transaction. Another example is combined equity-currency trades, in which one is purchasing foreign equity in the native currency and simultaneously effecting the required currency exchange trade. Yet another example are "swaps," wherein one income and/or payment stream is swapped for another. More general extensions can be envisioned, involving an arbitrarily complex set of linked trades across multiple securities types.
All current techniques and systems for implementation of linked trades are inefficient and carry some risk for the party desiring the trade for several reasons. First, the practical requirements of carrying out the multiple trades in significant volume may require hundreds or even thousands of telephone calls and/or keyboard entries into an electronic terminal connected to individual centers of liquidity for the securities involved. Therefore, a common practice among parties to such trades is to employ an intermediary who is willing either to take the contra side of the combined trade, acting as principal, or to negotiate and execute the simultaneous legs of the combined trade, acting as agent. Obviously, this service is not without cost to the original party, and in the case of a principal trade, the intermediary has now assumed the contra position in the corresponding securities, and in most cases, will want to unwind this position over time. In the case of an agency trade, the realized prices, and even the ability to execute the individual legs of the trade, are uncertain, which exposes the original party to financial risks that cannot be controlled in advance of trade implementation.
Second, the costs incurred in link trading are significantly high, especially where the contra position is negotiated with an intermediary acting as the principal in order to enable the trade to occur with certainty. As an example, an intermediary might charge as much as 3% of the total value of the trade on average, and more if the trade involves illiquid securities, to take the contra position.
Finally, index trading, which is a very prevalent example of multiple security linked trading, often incurs substantial "market impact" costs, in addition to the execution costs, as a result of the leakage of information into the marketplace. Adverse price moves in the individual securities making up the index can be arranged to the benefit of other market participants (and the detriment of the party desiring the trade) if the other market participants have information about an impending index trade(s). Thus, the linked trader desires both anonymity of the fact that he is trading in linked securities and non-disclosure of his desired position in each of the securities to the market.
The present invention is therefore directed to the problem of developing a method and system for automatically negotiating an optimum agreement between parties desirous of obtaining such an agreement without necessarily identifying the parties and their positions to each other, which method and apparatus is suitable for performing linked trading in a way that optimizes the trade prices for the participants on both sides of the trades and does so without disclosing the identity of the trader and his position in the securities at issue.